Essays on the Consequences of Publicly Provided Prescription Drug Insurance

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<bold>Chapter 1: The Anticipatory Effects of Medicare Part D on Drug Utilization</bold>
This paper quantifies the anticipatory effects of the passage of Medicare Part D on prescription drug utilization. Part D expanded Medicare to include insurance coverage for prescription drugs for the first time. While the program was implemented in 2006, it had been signed into law two years earlier in December 2003 as part of the widely publicized Medicare Modernization Act. The advance announcement of this permanent future price reduction may have induced forward-looking individuals to change their drug spending before Part D took effect. In a life-cycle demand framework, this pre-reform utilization response is theoretically ambiguous due to opposing income and intertemporal substitution effects. In this paper, I estimate the causal utilization response to the announcement of Part D in 2003 using data from the MCBS and MEPS. This contrasts with previous evaluations of Part D, and of drug co-insurance changes more broadly, which have estimated only contemporaneous utilization effects, thus implicitly assuming a myopic policy response. My main empirical strategy exploits the predicted differential responses of chronic and acute drugs to anticipated future prices. Given that acute drugs treat illnesses that are largely unpredictable and short in duration, their demand is more likely to respond to only current prices, whereas chronic drug use may respond negatively or positively to anticipated future price reductions. I find evidence of an overall decline in drug use for Medicare beneficiaries between 2003 and 2005. As predicted, this pre-reform decline is differentially driven by reductions in chronic drug use, while acute drugs are responsive to only price changes at the time of program implementation. The effect is also concentrated among the youngest Medicare beneficiaries, for whom the health costs of delaying treatment are lowest, and for those with below-median incomes. After accounting for this negative anticipatory response, I find a total treatment effect on utilization in the first year of the program that is substantially smaller than if anticipation effects are ignored.
<bold>Chapter 2: Perverse Reverse Price Competition: Average Wholesale Prices and Medicaid Pharmaceutical Spending (with Mark Duggan and Judith Hellerstein)</bold>
Generic drugs comprise an increasing share of total prescriptions dispensed in the U.S., rising from nearly 50 percent in 1999 to 75 percent in 2009. The generic drug market has typically been viewed as a mostly competitive market with price approaching marginal costs. However, the large presence of third party payers as final purchasers may distort prices and market shares relative to what a standard model of price competition would predict. In this paper, we investigate how generic drug producers compete in the presence of the procurement rules of the Medicaid program. Medicaid reimbursement to pharmacies, like that of other payers, is based on a benchmark price called the average wholesale price (AWP), which is published in several pricing catalogues. This list price is reported by generic producers themselves, and until recently has been subject to essentially no independent verification. As a result, generic producers have had an incentive to compete for pharmacy market share by reporting AWPs that are much greater than actual average prices, as this spread leads to larger pharmacy profits. In 2000, after a federal government audit of actual wholesale prices of generic products, states were advised to reduce Medicaid reimbursement by as much as 95% for about 400 generic and off-patent injectable, infusion, and inhalation drug products. We use variation induced by the timing of this policy along with its differential impact on drug products to identify the impact of this exogenous price change on the market share of affected products. Our findings indicate that pharmacies respond to the perverse incentives of the Medicaid program by stocking products with the highest AWPs.